Speech

Remarks at the Aerospace Industries Association President's Dinner

Senators, Congressman, Governors, all of those here from industry, it is a true pleasure to join you at this distinguished event.

I want to extend my thanks to Marion and to AIA for helping promote open and constructive dialogue between industry and the Department. I think we are all in agreement that forums such as this improve the level of discourse, trust, and tenor of our deliberations. So thank you.

I would like to start my remarks this evening with a letter we recently received. The letter reflects both the opportunities we have and the challenges we face with national security in an era of fiscal austerity.

Now we get a lot of mail—not all of it flattering. But this one comes from a future member of AIA.

It is from a young student named Hunter. It reads: “Hi, I’m nine, but I’m smart.” I told you he will be a future AIA member.

He continues: “I’ve been fascinating by planes. I’m sending you a blue print of one called the M-62.” The drawing he enclosed shows a triangle shaped wing, with four bombs, and three flaps. Hunter’s plane has only one engine. So I assume he has been following the debate over the Alternate Engine.

Hunter went on to write, “You have to keep this between us and the President. This plane is top secret.” Finally, he indicated that the only compensation he wanted for his design was a model of the final product.

Hunter’s letter highlights the issues confronting us. Our future security is inextricability tied to the technology we produce. But we are entering a period of significant resource constraints. For the past decade, we have lived in a world where when we faced new security challenges, we could meet them with increased resources. We have lived in a world where when we wanted to build systems with new technology, like Hunter’s bomber, we could increase our budget. Going forward, we will not have that luxury. We are going to have to make hard choices.

In my view, the central challenge we face today in defense planning is how to manage a slowdown in spending responsibly in the midst of two active conflicts, other commitments, and numerous threats.

The United States and almost all of our European allies are experiencing a significant fiscal crisis. Putting our economics back on sound footing will require cuts in government spending. In the U.S. and elsewhere, everything has to be on the table: revenues, entitlements, domestic discretionary spending, and defense spending.

Managing our militaries under these circumstances will challenge defense policymakers and industry executives alike. We have at present the most capable, professional fighting force the world has ever known. Our challenge is to accommodate our changing fiscal circumstances without undercutting our military effectiveness, now or in the future.

For guidance on how to slow spending responsibly, while still providing our military the materiel it needs, history is instructive. In the U.S., we have arrived at the fifth inflection point of post-World War II defense spending. The first three drawdowns came at the end of wars—World War II, Korea, and Vietnam. Then in the mid-1980s we faced a situation somewhat analogous to today. Deficits during the Reagan Administration led Congress to impose spending caps. The end of the Cold War then accelerated defense reductions.

What these transitions in defense spending have in common is that the U.S. military suffered a disproportionate loss of capability as a result. Each time we had to rebuild much of the capability we lost, often at great expense and under urgent circumstances. In other words, we have gone 0-for-4 in managing the drawdowns to date.

With troops deployed in active conflicts, we must do this better this time around. And we can do better, by learning the lessons from prior drawdowns and applying them to our thinking today.

I would draw four broad lessons from prior drawdowns.

The first is to make hard decisions early. Things are not going to get better. In a drawdown, there will be less money than we anticipate in the future, not more. Moreover, even well-managed programs experience some cost growth. The bottom line is that if we cannot afford it now, we will certainly not be able to afford it in the future. To live within our expected resource levels, we need to make the hard decisions now. Every dollar we spend on systems and programs we ultimately do not need or cannot afford, is a dollar we cannot spend on the systems we must have. The equation is that simple.

The second lesson from prior drawdowns is that it is impossible to generate the needed savings through pure efficiencies alone. By pure efficiencies, I mean where you perform the same function for less money. For instance, cloud computing holds out the potential of generating greater capability at lower cost across our information technology enterprise. But we are not going to find enough pure productivity gains to generate all the required savings. This means that we have to prioritize. We will have to eliminate programs that, while valuable, are not valuable enough to sustain in this budget environment. The "nice to haves” must go.

The third lesson is that reductions must be done in a balanced way. Reductions focused on a single area, like operational accounts, hollow out the force by depriving it of needed training and maintenance. Similarly, reductions that single out investment accounts, which are easy to target, effectively force a procurement holiday. Outdated equipment then needs to be replaced at great expense a decade or so later. To avoid this from coming to pass, we need to balance reductions across force structure, operating, and investment accounts. We do not want a force that is the same size but does everything less well.

The final lesson from prior drawdowns is not to cut too much, and to not cut too fast, especially from core mission areas. Rebuilding capabilities five, ten, or fifteen years later comes with a cost multiplier. And cost alone is not the only price we pay. We have paid for some of our prior drawdowns with the lives and welfare of our troops who find themselves in conflicts for which they are neither prepared nor equipped. This was particularly true in the 1950s, when the drawdown after World War II caused our forces to pay a high price in the initial stages of the Korean conflict. We do not want to make precipitous cuts today that we will come to regret in the future.

To help us manage this drawdown, we have begun a comprehensive review that will frame our choices in terms of strategy, missions, and capabilities rather than budget targets alone. The lessons of the past will loom large in this review. We need to avoid across-the-board cuts that will weaken all capabilities, whether critical or secondary. Instead, we must make vertical rather than horizontal cuts, based on strategic assessments of what must be retained and what can be sacrificed.

As we address the implications of a slowdown in spending, it is crucial that we preserve the capabilities resident in our industrial base. And by industrial base, I mean not just the facilities that manufacture the components critical to our warfighting dominance. I mean the financial strength and durability of the companies that run those factories, that invest in next-generation technologies, and that design the increasingly complex systems that allow our warfighters to succeed on the battlefield.

The industrial base we have today is a relatively recent development in our nation’s history. Before World War II we relied largely on an arsenal system, where the government itself designed and produced most of the weapons and munitions we needed. The arsenal system was a corollary to our reliance on mass mobilization in times of war—with no large standing army to serve, there was no foundation for a defense industry. The risks inherent in such a system became clear during World War I. With no ability to ramp up production quickly, our forces were largely dependent on the British and the French for supplies of advanced munitions.

World War II constituted a paradigm shift. In a time of crisis, we engaged the ingenuity of American industrial base, producing a tide of weapons and material that won the war. The achievement largely eliminated the arsenal system. And the enduring partnership between science, industry, and the military has meant that our forces have always taken to the battlefield with a technological edge.

Our defense industrial base has emerged in the past three generations as a national asset. Thousands of firms and suppliers—some big, others small—help equip our military. These firms, their suppliers, and their suppliers’ suppliers, are each links in a chain that, if broken, can have outsized consequences on our military capabilities.

To ensure the nation has the industrial capacity it needs going forward, we are conducting a study of the industrial base. We are going sector-by-sector, tier-by-tier, to assemble a long-term policy to protect that base as we slow defense spending. This detailed review will inform our budget decisions, our acquisition decisions, and our industrial policy. Already, several overarching themes are emerging.

The first is the importance of preserving competition - in the broadest sense of the word. For the past sixty years, competition in the defense industrial base has provided our armed forces with more reliable equipment and better technology than our adversaries. Competition not only ensures the defense industry is fully exposed to the 21stcentury currents of technology, innovation, and capital markets. It also yields the best goods and services for the warfighter.

As I have previously stated, the globalization of someelements of our industrial base is not an option. It is a reality. The corollary of ensuring our defense market welcomes competition from abroad is ensuring that U.S. firms have full access to the international market.

That leads to the second theme – the importance of international sales to our industrial base. A significant impediment to our international competitiveness is the archaic export control system. That system frequently fails in its central purpose of preventing states of concern from acquiring sensitive technologies. Indeed, from the results, one might think that the central purpose of our export control system is to make it difficult and time consuming for our closest allies—many of whom fight alongside us today—to buy our weapons.

The barriers that we place at this point in the export control system look something like a marriage of the complexity of the Internal Revenue Service with the inefficiency of the Department of Motor Vehicles. It's something we have to change. We need to reverse this dynamic.

Toward that objective, the Obama Administration is undertaking comprehensive export control reform. The President, the Secretary of Defense, and the Secretary of State are committed to seeing reform through. The heart of the reform is a single integrated process – a single agency making decisions from a single munitions list utilizing a single information technology system. We are already making progress on related fronts with the passage of Defense Trade Cooperation Treaties with the UK and Australia.

In parallel with export control reform, we are changing our policies for technology security and foreign disclosure. How we transfer sensitive information to foreign partners is currently governed by thirteen separate processes that are neither integrated nor synchronized. This process looks like a plate of spaghetti. You cannot tell where one strand ends and another begins. And, if you want to try to advance the system, you pick up one of the strands and push. The goal of our reforms in technology transfer is to create a single process that is integrated and centrally governed.

The final theme emerging from our study of the industrial base is the importance of targeted research and development spending even as budgets decline. Defense spending plunged in the 1970s after Vietnam. But even then, the Department made sure promising research and development continued. One product we kept investing in lowered radar reflections from aircraft. Stealth technology is one of our military’s most important advantages today. If not for careful stewardship in the lean years of the 1970s, it would have been left on the drawing board rather than deployed in our force.

Examples of key technologies we must work with industry to continue incubating today include long range strike systems, unmanned aerial vehicles (UAVs), and cyber defense capabilities.

Each of these technology areas will be crucial to future conflicts. We do not yet know the exact shape they will take, or the precise advantages they will confer. But unless we shield the research and development funds that support them, we will deny future decision-makers the opportunity to deploy these technologies, and deny the nation the security gains that accrue as a result.

Seeing through these investments in our security will require sustained stewardship from both government and industry. Those of us in the Department, like most of you in this room, are in this for the long-haul. And we need industrial partners and financial backers who think and act likewise. In this respect, our viewpoint is similar to long-term investors, not short-term speculators. Think Warren Buffet, not Gordon Gekko. Only by taking the long view can we collaboratively manage the slowdown in defense spending without disrupting the capabilities of the effective military forces our nation has developed.

If we continue to execute the four lessons of tough choices, prioritization, balance, and avoiding precipitous cuts, we can successfully transition the defense enterprise to the new fiscal environment. But we must do so in concert with industry.

Going back to Hunter, my nine-year old aspiring aerospace engineer, he closed his letter by saying: “Please make [my design] real.” And that is our challenge today. We will have fewer resources in the future, but we still need to be able to make good ideas real. We need to retain the capability to produce the systems and technologies that will make our nation stronger and safer. At the end of the day, we need to be sure we can give Hunter more than just a model.